Time for some serious TLC on this old warhorse. Neck set, new bridge (probably), and a refret while you are at it. The question is, would you like something better than this guitar for the cost? When I had similar issues with my D 35, I answered no and spent over $1000 on it.
In case Jfilm's still watching, I want to point out that Br1ck knew what he was getting into when he bought the guitar and elected to go for a full-blown restoration including a genuine NCL re-finish, something not easily (or cheaply) accomplished here in CA, and even got a replacement original rosewood bridge from Hans, and had the work done at one of the original Guild authorized service centers here in San Jose.
He knew he was investing more than the guitar could possibly appraise for but still considered it an excellent investment according to his personal valuation of the instrument (sometimes called "sentimental value")
Sentimental value can justify spending more on an instrument than it's technically "worth", ESPECIALLY if one's already owned the instrument for many years and experienced the full value of original ownership.
In many cases, and what I think Br1ck was
really getting at, it's also still possible to wind up with a guitar that outclasses what could be purchased new for the same cost.
He's never expressed anything but complete satisfaction with his investment in his D35, that I can recall.
(Br1, please correct me on anything if needed)
Jfilm, in your case, I think a D40 of that vintage is well worth the investment.
And I'd ask Hans about that bridge, it actually doesn't look shaved to me, might still be usable.